BackMark to Market | A sea change in market sentiment
There is no doubt that sentiment has changed dramatically for the better
Premium(Abhijit Bhatlekar/Mint)
The MSCI India equity index has moved up 12.3% this month, making it the best performer among emerging markets. The MSCI emerging markets index is up 6.3% this month, which suggests the balance 6% increase is due to the government’s new-found energy.
The massive quantitative easing or asset purchase programmes being followed by the monetary authorities in the US, the UK, Europe and Japan are all aimed at reviving their economies, but with interest rates already so low, it’s doubtful if they will increase borrowing, either for consumption or investment. Previous rounds of quantitative easing haven’t led to an economic recovery.
But there’s one thing quantitative easing has done—it has certainly led to higher markets. The MSCI US index is now back to its January 2008 level. Ditto for MSCI UK. And while the MSCI Europe index hasn’t done that well, the third round of quantitative easing (QE3) has sent the MSCI Spain index up an astonishing 14.1% this month, making it the best performer. Whether this so-called wealth effect has any impact on the economy or not is debatable, but there’s no doubt that the QE programmes do increase wealth in the stock markets.
As a note by the Bank for International Settlements points out, central bank asset purchases “lower longer-term yields, inducing investors to rebalance their portfolios towards assets with greater risk." And further, “Such portfolio rebalancing is one of the key objectives of unconventional policies, intended to stimulate investor risk-taking by reducing the attractiveness of government securities relative to risky assets."
True, with yields on government securities in the developed world already so low, the added incentive for portfolio rebalancing provided by successive bouts of QE has been waning. This time, though, both the US and European central banks have signalled they will continue with monetary easing until the economy recovers, which takes us into uncharted territory.
Will the rally last? The Bank of America-Merrill Lynch global survey of fund managers carried out earlier this month showed equity allocations were low and cash levels relatively high. That suggests there’s some more juice in the global rally.
In India, it’s doubtful whether growth is going to accelerate in a hurry, in spite of the new-found energy in the government. Economists haven’t yet revised forecasts of low growth this year or the next, arguing that the impact of the government’s measures will be back-ended. Nor is inflation going to go away anytime soon.
However, there is no doubt that sentiment has changed dramatically for the better. The timing of the reform measures, which have coincided with a burst of liquidity through monetary easing by the banks in developed countries, has also helped. Stocks in beaten down sectors such as capital goods and realty and the state-owned banks were cheap and the chart shows the rotation that is taking place out of the defensives into them.
Market observers say the money flowing in is from long-only funds, able to take a long-term view on India. Like in the advanced countries, here too the policymakers want to buoy stock markets, so that firms can raise money, ease the pressure on banks and kick-start investment demand.
Reducing the withholding tax on overseas borrowing is part of the same game plan, allowing companies to access cheap funds at yields lowered by QE3. Expect a steady stream of announcements to keep the markets buoyant.
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